Robbins Fom8 Tb 04a

Fundamentals of Management, 8e (Robbins et al.)Quantitative Module

1) An optimistic manager will typically follow a maximax choice.Answer: TRUEExplanation: When optimistic, a manager will look to maximize the maximum possible payoff that is given by a maximax choice.Diff: 1 Page Ref: 94AACSB: Analytic skills

2) A pessimistic manager will typically follow a minimin choice.Answer: FALSEExplanation: When pessimistic, a manager will look to maximize the minimum possible payoff that is given by a maximin choice.Diff: 2 Page Ref: 94AACSB: Analytic skills

3) With choice S1, a manager sees gains of $10 million and $6 million. With choice S2, a manager sees gains of $12 million and $3 million. The manager chooses S2, so she must be optimistic.Answer: TRUEExplanation: The manager chose the greatest possible gain, so she used a maximax strategy that is typical of an optimist.Diff: 2 Page Ref: 94AACSB: Analytic skills

4) With choice S1, a manager sees gains of $10 million and $6 million. With choice S2, a manager sees gains of $12 million and $8 million. S2 might be the choice of a pessimistic manager.Answer: TRUEExplanation: S2 has the greatest possible minimum payoff, so it could be the strategy of an optimist. It could also be the strategy of a pessimist since S2 also has the greatest possible maximum.Diff: 3 Page Ref: 94AACSB: Analytic skills

5) With choice S1, a manager sees gains of $10 million and $6 million. With choice S2, a manager sees gains of $12 million and $8 million. Only a pessimistic manager would choose S1.Answer: FALSEExplanation: S1 is not a good choice for an optimist or a pessimist. It has a low possible maximum and minimum.Diff: 3 Page Ref: 94AACSB: Analytic skills

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6) Regret is computed by subtracting the value of a possible strategy from the greatest value in the entire matrix.Answer: FALSEExplanation: Regret is computed by subtracting the value of a possible strategy from the greatest value in the same column in a matrix.Diff: 2 Page Ref: 94AACSB: Analytic skills

7) This payoff matrix gives values for strategies S1, S2, and S3 for the Bigg Company and competitive strategies CA1, CA2, and CA3 for the Large Company. From Bigg's point of view, the S1 maximum regret for CA1 is 8.

CA1 CA2 CA3S1 8 5 12S2 9 14 3S3 16 13 20Answer: TRUEExplanation: The difference between the S1 value of 8 and the maximum CA1 value of 16 is 8.Diff: 1 Page Ref: 94AACSB: Analytic skills

8) This payoff matrix gives values for strategies S1, S2, and S3 for the Bigg Company and competitive strategies CA1, CA2, and CA3 for the Large Company. From Bigg's point of view, the S1 maximum regret for CA2 is 8.

CA1 CA2 CA3S1 8 5 12S2 9 14 3S3 16 13 20Answer: FALSEExplanation: The difference between the S1 value of 5 and the maximum CA2 value of 14 is 9.Diff: 1 Page Ref: 94AACSB: Analytic skills

9) This payoff matrix gives values for strategies S1, S2, and S3 for the Bigg Company and competitive strategies CA1, CA2, and CA3 for the Large Company. From Bigg's point of view, the S2 maximum regret is 9.

CA1 CA2 CA3S1 8 5 12S2 9 14 3S3 16 13 20Answer: FALSEExplanation: The difference between the S2 value of 3 and the maximum CA3 value of 20 is 17.Diff: 1 Page Ref: 94AACSB: Analytic skills


10) This payoff matrix gives values for strategies S1, S2, and S3 for the Bigg Company and competitive strategies CA1, CA2, and CA3 for the Large Company. From Bigg's point of view, the S3 maximum regret is 1.

CA1 CA2 CA3S1 8 5 12S2 9 14 3S3 16 13 20Answer: TRUEExplanation: The S3 value for CA2 is 13, which is 1 less than the maximum CA2 value of 14.Diff: 1 Page Ref: 94AACSB: Analytic skills

11) This regret matrix gives values for strategies S1, S2, and S3 for the Bigg Company and competitive strategies CA1, CA2, and CA3 for the Large Company. A minimax Bigg manager would choose S2 because it has the smallest maximum regret of 1.

CA1 CA2 CA3S1 5 5 3S2 9 6 1S3 10 2 5Answer: FALSEExplanation: A minimax manager would choose S1, the strategy with the smallest maximum regret of 5.Diff: 1 Page Ref: 95AACSB: Analytic skills

12) This regret matrix gives values for strategies S1, S2, and S3 for the Bigg Company and competitive strategies CA1, CA2, and CA3 for the Large Company. The maximum regrets for this table are S1 = 5, S2 = 9, S3 = 12.

CA1 CA2 CA3S1 5 5 3S2 9 6 1S3 10 12 5Answer: TRUEExplanation: The maximum regret is the greatest value in each row.Diff: 1 Page Ref: 95AACSB: Analytic skills


13) This regret matrix gives values for strategies S1, S2, and S3 for the Bigg Company and competitive strategies CA1, CA2, and CA3 for the Large Company. A minimax Bigg manager choosing S3 would have a greatest possible regret of 2.

CA1 CA2 CA3S1 5 5 3S2 9 6 1S3 10 2 5Answer: TRUEExplanation: The greatest possible regret would be 10.Diff: 1 Page Ref: 95AACSB: Analytic skills

14) Decision trees are unreliable for making pricing decisions.Answer: FALSEExplanation: Decision trees are useful for making hiring, marketing, investment, equipment, purchasing, and pricing decisions.Diff: 1 Page Ref: 95AACSB: Analytic skills

15) The decision tree shows the profit outcomes for a sandwich shop in a strong and a weak economy. If the economy is strong, the shop is likely to make an $80,000 profit.

Answer: TRUEExplanation: The profit from a strong economy is the full $80,000 as shown in the figure.Diff: 2 Page Ref: 95-96AACSB: Analytic skills


16) The decision tree shows the profit outcomes for a sandwich shop in a strong and a weak economy. If the economy is weak, the shop is likely to make 60 percent of a $25,000 profit, or $15,000.

Answer: FALSEExplanation: The profit from a weak economy is the full $25,000 as shown in the figure.Diff: 2 Page Ref: 95-96AACSB: Analytic skills

17) The decision tree shows the profit outcomes for a sandwich shop in a strong and a weak economy. Overall, the shop is expected to make $32,000.

Answer: FALSEExplanation: Overall, the shop will make the sum of the probability products, or (0.40 × $80,000) + (0.60 × $25,000) = $32,000 + $15,000 = $47,000.Diff: 2 Page Ref: 95-96AACSB: Analytic skills


18) The decision tree shows the profit outcomes for a sandwich shop in a strong and a weak economy. The shop is likely to make $105,000, the sum of both projections.

Answer: FALSEExplanation: Overall, the shop will make the sum of the probability products, or (0.40 × $80,000) + (0.60 × $25,000) = $32,000 + $15,000 = $47,000.Diff: 2 Page Ref: 95-96AACSB: Analytic skills

19) A manager uses break-even analysis to find out how many units of a product he needs to sell to make a profit of zero.Answer: TRUEExplanation: The break-even point is located for a profit of zero—that is, it is the point at which the product begins to return a profit.Diff: 2 Page Ref: 96AACSB: Analytic skills

20) The break-even point is computed by the formula BE = TFC/(P – VC)].Answer: TRUEExplanation: TFC stands for total fixed costs, P stands for the price of the product per unit, and VC stands for variable costs for each unit.Diff: 1 Page Ref: 97AACSB: Analytic skills

21) The greater the ratio of TFC to (P – VC) is means that the business needs to sell fewer units to make a profit.Answer: FALSEExplanation: The reverse is true. When the ratio of TFC to (P – VC) is high, the business needs to sell more units to turn a profit.Diff: 2 Page Ref: 97AACSB: Analytic skills


22) Reducing the value of VC in a break-even analysis means that the business needs to sell fewer units to turn a profit.Answer: TRUEExplanation: A smaller VC results in a smaller TFC to (P – VC) ratio, which translates into fewer units sold to turn a profit.Diff: 2 Page Ref: 97AACSB: Analytic skills

23) Liquidity is a measure of an organization's ability to access cash to meet its debt obligations.Answer: TRUEExplanation: The organization may meet debt obligations by selling its assets or by using the cash it has on hand.Diff: 2 Page Ref: 97AACSB: Analytic skills

24) A current ratio of 1.5 to 1 for an organization suggests that the organization will not be able to meet its short-term debt obligations.Answer: FALSEExplanation: An organization is not in danger of not meeting its debts until the ratio gets to 1:1 or lower.Diff: 1 Page Ref: 98AACSB: Analytic skills

25) An organization with a high leverage ratio has usually been overly cautious and conservative in its borrowing.Answer: FALSEExplanation: High leverage indicates a company that has borrowed too much, not too little.Diff: 2 Page Ref: 98AACSB: Analytic skills

26) Return on investment measures the ratio of total profits to total assets.Answer: FALSEExplanation: Return on investment measures the ratio of net profits to total assets.Diff: 2 Page Ref: 98AACSB: Analytic skills

27) A company is worried about meeting its interest expenses, so it should pay close attention to its times interest earned.Answer: TRUEExplanation: Times interest earned compares profit before interest and taxes to total interest charges, showing how readily a company can pay its interest expenses.Diff: 1 Page Ref: 98AACSB: Analytic skills


28) Production data is shown for the number of hours required per unit for the Running and Soccer versions of Streaks, custom made athletic shoes. Using linear programming, if running shoes are represented by R and soccer shoes by S, the expression $16R + $20S is equal to the maximum profit that can be made.

Monthly Product

Answer: FALSEExplanation: The maximum profit expression should be $20R + $16S.Diff: 2 Page Ref: 99AACSB: Analytic skills

29) Production data for Streaks is shown. Using linear programming, if running shoes are represented by R and soccer shoes by S, 5R + 3S < 750 is the correct constraint equation for design.

Monthly Product

Answer: TRUEExplanation: The expression 5R + 3S < 750 is the correct constraint equation for design because it correctly places each variable. The company has 750 hours of capacity that can be split up in different ways. The constraint shows that the design process takes longer for running shoes than soccer shoes.Diff: 2 Page Ref: 100AACSB: Analytic skills

30) Production data for Streaks is shown. Using linear programming, the maximum number of soccer shoes that the plant can make is 250.

Monthly Product

Answer: TRUEExplanation: The maximum number of soccer shoes that can be made is found by dividing the maximum number of hours that can be spent in design by the number of design hours that it takes for each design, or 750 ÷ 3 = 250.Diff: 1 Page Ref: 100AACSB: Analytic skills


31) Production data for Streaks is shown. Using linear programming, the maximum number of running shoes that the plant can make is 250.

Monthly Product

Answer: FALSEExplanation: The maximum number of running shoes that can be made is found by dividing the maximum number of hours that can be spent in design by the number of design hours that it takes for each design, or 750 ÷ 5 = 150.Diff: 2 Page Ref: 100AACSB: Analytic skills

32) Production data for Streaks is shown. Using linear programming, if the plant makes 100 pairs of running shoes and 100 pairs of soccer shoes, it ends up with $3600 in profit.

Monthly Product

Answer: TRUEExplanation: The plant will make (100 × $20) + (100 × $16), or $3600 in profit.Diff: 2 Page Ref: 100AACSB: Analytic skills

33) Another term for queuing theory is "waiting line" theory.Answer: TRUEExplanation: Queuing theory is concerned with the costs and benefits of using a facility, such as a bank teller station or a gas station.Diff: 1 Page Ref: 101AACSB: Analytic skills

34) A queuing theory analysis for bank teller windows comes up with a value of 0.10 for P, indicating that customers are likely to wait about 10 minutes for each transaction. Answer: FALSEExplanation: A value of 0.10 for P indicates that the limit that has been set will be exceeded 10 percent of the time.Diff: 2 Page Ref: 101AACSB: Analytic skills


35) Using a fixed-point reordering system, a business might order new inventory when it is down to about one-third of its maximum stock.Answer: TRUEExplanation: Fixed-point reordering typically identifies the reordering point at some fixed time along the way, such as when inventory is reduced to one-third of its maximum.Diff: 2 Page Ref: 101AACSB: Analytic skills

36) In the economic order quantity (EOQ) model, one of the costs that gets considered for analysis is the carrying costs of tying up money with inventory.Answer: TRUEExplanation: Storage, insurance, taxes, and other costs are also categorized under the heading of carrying costs.Diff: 2 Page Ref: 101AACSB: Analytic skills

37) The goal of the economic order quantity (EOQ) model is to maximize the total costs that are categorized as carrying costs and ordering costs.Answer: FALSEExplanation: The goal of economic order quantity (EOQ) is to minimize, not maximize, the total costs that are categorized as carrying costs and ordering costs.Diff: 2 Page Ref: 102AACSB: Analytic skills

38) In the economic order quantity (EOQ) model, the optimum order quantity is obtained by identifying where the total cost curve and the ordering costs curve intersect.Answer: FALSEExplanation: The optimum order quantity is obtained by identifying where the carrying costs curve and the ordering costs curve intersect.Diff: 2 Page Ref: 102AACSB: Analytic skills

39) In the economic order quantity (EOQ) model, increasing the order size will decrease ordering costs.Answer: TRUEExplanation: Ordering costs will go down since fewer orders will need to be made over the course of the year.Diff: 2 Page Ref: 102AACSB: Analytic skills

40) In the economic order quantity (EOQ) model, decreasing the order size will increase carrying costs.Answer: FALSEExplanation: Smaller orders will result in lower carrying costs as the need for such things as storage and extra inventory will be reduced.Diff: 2 Page Ref: 102AACSB: Analytic skills


41) The purchase price of a product has no influence on calculating EOQ.Answer: FALSEExplanation: The variable V for the value or purchase price of the product is part of the formula for computing EOQ.Diff: 2 Page Ref: 94AACSB: Analytic skills

42) Which role does uncertainty typically play in how managers function?A) Uncertainty limits the amount of information that is available.B) Uncertainty increases the amount of information that is available.C) Uncertainty improves the quality of information that is available.D) Uncertainty enhances the information that is available.Answer: AExplanation: A) Uncertainty causes managers to reduce their ambitions and scale back their goals because the information they have is not reliable or is inaccurate.Diff: 2 Page Ref: 94AACSB: Analytic skills

43) Which psychological orientation would be typical of a manager who is optimistic about her business environment?A) a maximin orientationB) a minimin orientationC) a maximax orientationD) a minimax orientationAnswer: CExplanation: C) An optimistic manager wants to maximize her payoff. She is certain that she will be successful, so she strives to make her success as great as possible. This maximum possible payoff corresponds to a maximax orientation.Diff: 2 Page Ref: 94AACSB: Analytic skills

44) A manager is worried that if he chooses the wrong investment strategy, his company could lose out on a great deal of money. Which strategy should he follow?A) a maximax orientationB) a minimin orientationC) a maximin orientationD) a minimax orientationAnswer: DExplanation: D) The manager is worried about regret—the amount of money that could have been made had he chosen a different strategy. To minimize regret, the manager should choose a minimax strategy that minimizes the maximum amount of regret he can experience. Diff: 2 Page Ref: 94AACSB: Analytic skills


45) Which psychological orientation would be typical of a manager who is pessimistic about her business environment?A) a maximin orientationB) a minimin orientationC) a maximax orientationD) a minimax orientationAnswer: AExplanation: A) A pessimistic manager wants to minimize her payoff. She is uncertain about the outcome of her effort, so she strives to maximize the minimum return she can get for her investment. This maximum possible minimum payoff corresponds to a maximin orientation.Diff: 2 Page Ref: 94AACSB: Analytic skills

46) This payoff matrix gives potential dollar gain values in millions for strategies S1, S2, S3, and S4 for the Bent Fork National Bank and competitive strategies CA1, CA2, and CA3 for the Straight Spoon Bank. If Bent Fork is optimistic, which strategy will it choose?

CA1 CA2 CA3S1 3 24 17S2 15 16 14S3 8 19 10S4 20 2 11A) S1B) S2C) S3D) S4Answer: AExplanation: A) The S1 strategy gives the greatest possible gain, 24, a chance for Bent Fork to maximize its success. For an optimist, this is the best choice because it allows Bent Fork to capitalize on its feeling that it will be successful.Diff: 2 Page Ref: 94AACSB: Analytic skills


47) This payoff matrix gives potential dollar gain values in millions for strategies S1, S2, S3, and S4 for the Bent Fork National Bank and competitive strategies CA1, CA2, and CA3 for the Straight Spoon Bank. If Bent Fork is pessimistic, which strategy will it choose?

CA1 CA2 CA3S1 3 24 17S2 15 16 14S3 8 19 10S4 20 2 11A) S1B) S2C) S3D) S4Answer: BExplanation: B) The S2 strategy gives the greatest possible minimum gain, 14, a chance for Bent Fork to maximize its worst possible outcome. For a pessimist, this is the best choice because it allows Bent Fork to get the best possible "worst" outcome.Diff: 2 Page Ref: 94AACSB: Analytic skills

48) This payoff matrix gives potential dollar gain values in thousands for strategies S1, S2, S3, and S4 for Sam's Pizza and competitive strategies CA1, CA2, and CA3 for Pam's Pizza. If Sam chooses S4, how is he feeling about the business climate?

CA1 CA2 CA3S1 13 14 7S2 7 17 12S3 31 29 4S4 20 12 21A) Sam is feeling optimistic because he has chosen a maximax strategy.B) Sam is feeling pessimistic because he has chosen a maximin strategy.C) Sam is feeling optimistic because he has chosen a maximin strategy.D) Sam is feeling pessimistic because he has chosen a maximax strategy.Answer: BExplanation: B) Sam has chosen the strategy with the greatest minimum, 12, indicating that he is expecting bad times ahead, so he wants to get the greatest possible low result rather than the greatest possible high result. This reflects a pessimistic outlook on the future.Diff: 2 Page Ref: 94AACSB: Analytic skills



CA1 CA2 CA3S1 13 14 7S2 7 17 12S3 31 29 4S4 20 12 21A) Sam is feeling pessimistic because he has chosen a maximax strategy.B) Sam is feeling pessimistic because he has chosen a minimax strategy.C) Sam is feeling optimistic because he has chosen a maximax strategy.D) Sam is feeling optimistic because he has chosen a maximin strategy.Answer: CExplanation: C) Sam has chosen the strategy with greatest maximum, 31, indicating that he is expecting good times ahead, so he wants to get the greatest possible low result rather than the greatest possible high result. This reflects an optimistic outlook on the future.Diff: 2 Page Ref: 94AACSB: Analytic skills

50) Which of the following best defines regret in a payoff matrix?A) Regret refers to the difference of the sum of the values in a chosen strategy and the sum of the best strategy.B) Regret refers to the difference of the sum of the values in a chosen strategy and the sum of the worst strategy.C) Regret refers to the sum total of the sum of the values in a chosen strategy and the sum of the best strategy.D) Regret refers to the extra amount of money that could have been made had the person chosen a different strategy.Answer: DExplanation: D) Regret measures the amount of extra money that could have been gained had the person chosen the "right" strategy. Thus, the greatest difference between a high score from another strategy and a score from the given strategy identifies the regret value.Diff: 2 Page Ref: 95AACSB: Analytic skills



CA1 CA2 CA3S1 13 14 7S2 7 17 12S3 31 29 4S4 20 12 21A) Sam is feeling pessimistic because he has chosen a maximax strategy.B) Sam is feeling optimistic because he has chosen a maximin strategy.C) Sam is feeling neither pessimistic nor optimistic because he has chosen neither a maximin nor a maximax strategy.D) Sam is feeling both pessimistic and optimistic because he has chosen both a maximin and a maximax strategy.Answer: CExplanation: C) Sam has chosen S1, which has neither the greatest maximum, which would indicate that he has the maximax strategy of an optimist, nor the greatest minimum, which would correlate to the greatest minimum value for a pessimist. Sam is also not focusing on getting the smallest possible regret because S3 has a smaller maximum regret value than S1.Diff: 2 Page Ref: 94AACSB: Analytic skills

52) This payoff matrix gives potential dollar gain values in thousands for strategies S1, S2, S3, and S4 for Sam's Pizza and competitive strategies CA1, CA2, and CA3 for Pam's Pizza. What is the maximum regret value for S1?

CA1 CA2 CA3S1 13 14 7S2 7 17 12S3 31 29 4S4 20 12 21A) 18B) 15C) 14D) 12Answer: AExplanation: A) The regret value shows the maximum amount that Sam can lose by making the wrong choice. In this case, the difference between the CA1 value of 13 and the CA1 value of 31 gives the maximum regret of 18 for S1, meaning the most that could have been lost had Sam not chosen S1 would have been 18 thousand dollars.Diff: 2 Page Ref: 95AACSB: Analytic skills



CA1 CA2 CA3S1 13 14 7S2 7 17 12S3 31 29 4S4 20 12 21A) 13B) 7C) 2D) 17Answer: DExplanation: D) The regret value shows the maximum amount that Sam can lose by making the wrong choice. In this case, the difference between the CA3 value of 21 and the CA3 value of 4 gives the maximum regret of 17 for S4, meaning the most that could have been lost had Sam not chosen S4 would have been 17 thousand dollars.Diff: 2 Page Ref: 95AACSB: Analytic skills


CA1 CA2 CA3S1 13 14 7S2 7 17 12S3 31 29 4S4 20 12 21A) 24B) 15C) 5D) 0Answer: AExplanation: A) The regret value shows the maximum amount that Sam can lose by making the wrong choice. In this case, the difference between the CA1 value of 7 and the CA3 value of 31 gives the maximum regret of 24 for S2, meaning the most that could have been lost had Sam not chosen S2 would have been 24 thousand dollars.Diff: 2 Page Ref: 95AACSB: Analytic skills


55) Which of the following would a manager choose who wants to minimize her maximum regret?A) the smallest maximum regret valueB) the smallest minimum regret valueC) the smallest difference maximum regret value and the minimum regret valueD) the greatest difference maximum regret value and the minimum regret valueAnswer: AExplanation: A) A minimax strategy minimizes the maximum regret. So the manager should compare the maximum regret values for each strategy and choose the smallest value among them.Diff: 2 Page Ref: 95AACSB: Analytic skills

56) This regret matrix gives potential dollar values in thousands for strategies S1, S2, S3, and S4 for Al's Fish Fry and competitive strategies CA1, CA2, and CA3 for Sal's Fish Bake. If Al wants to minimize his maximum regret, which strategy should he choose?

CA1 CA2 CA3S1 3 15 9S2 12 10 12S3 8 9 17S4 13 16 3A) S4B) S3C) S2D) S1Answer: CExplanation: C) Al's maximum regrets are 15 for S1, 12 for S2, 17 for S3, and 16 for S4. The lowest of the four maximum values is 12, so S2 identifies the smallest possible maximum regret.Diff: 2 Page Ref: 95AACSB: Analytic skills


57) This regret matrix gives potential dollar values in thousands for strategies S1, S2, S3, and S4 for Al's Fish Fry and competitive strategies CA1, CA2, and CA3 for Sal's Fish Bake. If Al chooses S3, what kind of strategy is he using?

CA1 CA2 CA3S1 3 15 9S2 12 10 12S3 8 9 17S4 13 16 3A) minimaxB) maximinC) maximaxD) miniminAnswer: CExplanation: C) Al has chosen the strategy that has the highest maximum regret value. Therefore, he has maximized the maximum regret value, or gone for the maximax strategy. This strategy does not make sense for most serious-minded managers.Diff: 2 Page Ref: 95AACSB: Analytic skills

58) In a decision tree, each possible outcome ________.A) gets assigned a probability value between 0 and 1.0B) gets assigned a probability value of 50 percentC) gets assigned a probability value between 0 and 50 percentD) gets assigned a probability value between 0.5 and 1.0Answer: AExplanation: A) In a decision tree, each possible outcome gets assigned a probability value. Thus, if there are two outcomes and it is 25 percent likely that outcome A will occur, it is therefore 100 percent - 25 percent, or 75 percent, likely that outcome B will occur. Outcome A will therefore be assigned a probability value of 0.25, and outcome B will have a 0.75 probability value.Diff: 2 Page Ref: 95AACSB: Analytic skills

59) In a decision tree, which of the following is true?A) The probabilities of all of the outcomes must be equal.B) The sum of the probabilities of all of the outcomes must equal 1.0.C) No outcome can have a probability that is less to 1.0.D) The sum of the probabilities of all of the outcomes must be greater than 1.0.Answer: BExplanation: B) In a decision tree, the probabilities must have a sum that equals 1.0, thereby indicating that there is a 100 percent probability that at least one of the outcomes will occur. Note that probabilities can be equal but certainly do not need to be equal to one another. Note also that if the sum of probabilities were greater than 1.0, it would indicate that the outcomes have more than a 100 percent chance of occurring, which does not make logical sense.Diff: 2 Page Ref: 95AACSB: Analytic skills


60) The decision tree shows the profit outcomes for a coffee shop in a strong and a weak economy for next year. What is the probability that the economy will be weak in the coming year?

A) 0.73B) 27 percentC) 50 percentD) 7.3Answer: AExplanation: A) There are only two outcomes in this decision tree. Since the sum of all outcomes must equal 100 percent, or 1.0, the probability of a weak economy is 1.0 - 0.27, or 0.73.Diff: 2 Page Ref: 95-96AACSB: Analytic skills

61) The decision tree shows the profit outcomes for a coffee shop in a strong and a weak economy for next year. Suppose a third outcome is considered in which a moderate economy is 33 percent likely to occur. With this added outcome, how does the probability of a weak economy change?

A) A weak economy is now 73 percent likely.B) A weak economy is also 33 percent likely.C) A weak economy is now 40 percent likely.D) A weak economy is now 0 percent likely.Answer: CExplanation: C) The addition of a third option of a moderate economy that is 33 percent likely to occur reduces the likelihood of a weak economy. Since the sum of all outcomes must equal 100 percent, or 1.0, the probability of a weak economy is 1.0 - 0.27 - 0.33, or 0.40.Diff: 3 Page Ref: 95-96AACSB: Analytic skills


62) The decision tree shows the profit outcomes for a toy store in a strong and a weak economy for next year. What is the expected value of the store's profit in a strong economy?

A) $10,500B) $15,000C) $16,000D) $30,000Answer: DExplanation: D) The expected value for the store is not affected by the probabilities themselves. All of the $30,000 profit expected in a strong economy will be realized if the economy is actually strong, which according to the data has only a 35 percent chance of occurring.Diff: 2 Page Ref: 96AACSB: Analytic skills

63) The decision tree shows the profit outcomes for a toy store in a strong and a weak economy for next year. If the economy turns out to be weak, how much profit is the store likely to lose out?

A) $14,000B) $16,000C) $30,000D) $15,000Answer: AExplanation: A) The amount of money that the owner will lose out on can be calculated by finding the difference between the two estimates corresponding to a strong and a weak economy: $30,000 (strong) - $16,000 (weak) = $14,000 lost.Diff: 2 Page Ref: 96AACSB: Analytic skills


64) The decision tree shows the profit outcomes for a toy store in a strong and a weak economy for next year. What is the expected value of profit for the store for the year?

A) $10,500B) $20,900C) $29,000D) $10,400Answer: BExplanation: B) The expected value is found by multiplying the probability of each outcome by its profit value. This is expressed by (0.35 × $30,000) + (0.65 × $16,000) = $20,900.Diff: 2 Page Ref: 96AACSB: Analytic skills


65) Decision trees show the profit outcomes for the plans for two doughnut stores in a strong and a weak economy for the future. Which store is expected to have the greater expected profit?

A) Store 1 has a $27,900 greater profit.B) Store 1 has a $1200 greater profit.C) Store 2 has a $26,700 greater profit.D) Store 2 has a $1200 greater profit.Answer: BExplanation: B) The expected value is found by multiplying the probability of each outcome by its profit value. This is expressed by (0.45 × $40,000) + (0.55 × $18,000) = $27,900 (store 1) and (0.45 × $30,000) + (0.55 × $24,000) = $26,700 (store 2). The difference between the stores is $27,900 - 26,700 = $1200.Diff: 2 Page Ref: 96AACSB: Analytic skills


66) Decision trees show the profit outcomes for the plans for two doughnut stores in two different locations in a strong and a weak economy for the future. If the investor interested in building a store is optimistic, in which location should she build?

A) She should build Store 1, because it has a lower minimum profit.B) She should build Store 2, because it has a greater maximum profit.C) She should build Store 1, because it has a greater maximum profit.D) She should build Store 2, because it has a greater minimum profit.Answer: CExplanation: C) An optimistic investor looks to use a maximax strategy. In this case, the store with greater upside corresponds to a maximax strategy. Store 1 has the greatest possible profit of $40,000, so it is the choice for an optimistic investor.Diff: 2 Page Ref: 96AACSB: Analytic skills


67) Decision trees show the profit outcomes for the plans for two doughnut stores in two different locations in a strong and a weak economy for the future. If the investor interested in building a store is pessimistic, in which location should she build?

A) She should build Store 2, because it has a greater minimum profit.B) She should build Store 2, because it has a greater maximum profit.C) She should build Store 1, because it has a greater maximum profit.D) She should build Store 1, because it has a greater minimum profit.Answer: AExplanation: A) A pessimistic investor looks to use a maximin strategy that maximizes the minimum gain. In this case, the store with the greatest minimum gain is store 2, since its low estimate is $24,000.Diff: 2 Page Ref: 96AACSB: Analytic skills

68) For break-even analysis, which of the following is a fixed cost for a doughnut shop?A) costs for purchasing flour and sugarB) energy costs for ovens and heatingC) interest payments on loansD) advertising costsAnswer: CExplanation: C) Though almost any cost can be stable for a period of time, the costs of purchasing raw materials, advertising, and energy are more variable than those of paying interest. Interest payments are regular and predictable throughout the life of a loan unless the terms of the loan are changed.Diff: 2 Page Ref: 96-97AACSB: Analytic skills


69) A manager does a break-even analysis and finds that his value for BE, the break-even point, has decreased over time. Which of the following could be responsible for this event?A) TFC has increased.B) P has increased.C) VC has decreased.D) P has decreased.Answer: DExplanation: D) The value of the expression [TFC/(P - VC)] would increase if TFC were to increase in value, VC were to decrease, or P were to increase. All of these events would increase the value of the numerator of the fraction relative to the denominator, thereby causing the value of fraction BE to increase. If P were to decrease, however, the denominator of the fraction would increase, causing the overall value of the fraction to decrease. Therefore, the value of BE, the break-even point, would decrease.Diff: 2 Page Ref: 96-97AACSB: Analytic skills

70) Fixed costs for a product are $50,000. The product itself sells for $5.00 and it costs $3.00 to make each product. What is the break-even point for the product?A) 100,000B) 10,000C) 50,000D) 25,000Answer: DExplanation: D) Plugging in the variables for the equation BE = [TFC/(P - VC)], you get BE = $50,000/(5 - 3), or 25,000 for BE. This means that the company must make 25,000 units of the product to begin making a profit.Diff: 2 Page Ref: 96-97AACSB: Analytic skills

71) Fixed costs for a product are $60,000. The product itself sells for $4.00 and it costs $1.00 to make each product. How will the break-even point for the product change if the variable cost per unit goes up to $1.50?A) The break-even point will increase by 4000.B) The break-even point will increase by 24,000.C) The break-even point will decrease by 4000.D) The break-even point will increase by 20,000.Answer: AExplanation: A) Plugging in the variables for the original break-even point, BE = [TFC/(P - VC)], you get BE = $60,000/(4 - 1), or 20,000 for BE. Changing the value of VC gives BE = $60,000/(4 - 1.50), or 24,000 for BE. Therefore, the value of BE increases from 20,000 to 24,000, or 4000.Diff: 2 Page Ref: 96-97AACSB: Analytic skills


72) Fixed costs for a product are $30,000. The product itself sells for $3.00 and it costs $1.50 to make each product. How can the plant decrease the break-even point by 5000 units?A) Increase P, the price of the item, by $0.50.B) Increase TFC, the fixed costs for item, by $5000.C) Decrease P, the price of the item, by $0.50.D) Decrease TFC, the fixed costs for item, by $5000.Answer: AExplanation: A) Plugging in the variables for the original break-even point, BE = [TFC/(P - VC)], you get BE = $30,000/(3 - 1.50), or 20,000 for BE. Changing the value of P by 50 cents gives BE = $30,000/(3.50 - 1.50), or 15,000 for BE, giving a break-even point that is 5000 lower than the original break-even point.Diff: 2 Page Ref: 96-97AACSB: Analytic skills

73) A company has a current ratio of of 2.75 to 1. What should a manager in the company conclude?A) The company is getting the best possible return on its assets.B) The company has too many liabilities.C) The company is not getting the best possible return on its assets.D) The company is not getting the best possible return on its liabilities.Answer: CExplanation: C) A current ratio of 2 to 1 is considered healthy for a typical company. Any value much lower than 2 to 1 may indicate that the company cannot meet its debts. A ratio nearing 3 to 1 suggests that the company is not using its assets efficiently, which is the situation for this company.Diff: 2 Page Ref: 98AACSB: Analytic skills

74) A company has a current ratio of of 0.85 to 1. What should a manager in the company worry about?A) The company has too many assets and is not using them efficiently.B) The company has too much inventory.C) The company may start to have trouble paying salaries.D) The company is paying salaries that are too high.Answer: CExplanation: C) A current ratio that is significantly less than 1.0 means that the company has too many liabilities relative to its assets. With this kind of liquidity problem, the company may experience difficulty in having enough cash to pay off its short-term obligations—things such as taxes, accounts payable, and salaries.Diff: 2 Page Ref: 98AACSB: Analytic skills


75) When is the acid test an especially important test for a company's liquidity?A) when the economy is slow and inventory is not sellingB) when the economy is robust and inventory is selling fastC) with companies that exclusively sell services and therefore do not have any inventoryD) with companies that exclusively sell services to the wealthy and therefore are not subject to economic downturnsAnswer: AExplanation: A) The acid test becomes especially important when the economy slows down and companies are stuck with inventory that can't be moved with the same speed that it was when the economy was healthy. By subtracting inventories from assets and comparing that difference to current liabilities, a manager gets a good picture of how much liquidity a company has.Diff: 2 Page Ref: 98AACSB: Analytic skills

76) Which of the following characterizes a highly leveraged company?A) high total assets relative to total debtB) high total debt relative to total assetsC) high total debt relative to inventoriesD) high total interest payments relative to total debtAnswer: BExplanation: B) A leveraged company takes on too much debt relative to the amount of assets it has. Leverage has nothing to do with inventories and it is not a measure of interest to the amount of money a company borrows.Diff: 2 Page Ref: 98AACSB: Analytic skills

77) Which of the following would cause a well-run company to become highly leveraged?A) when the money that the company can earn investing the money that it borrows is equal to the cost of borrowingB) when the money that the company can earn investing the money that it borrows is significantly less than the cost of borrowingC) when the money that the company can earn investing the money that it borrows is significantly greater than the cost of borrowingD) when the money that the company can earn investing the money that it borrows is equal to more than half of the cost of borrowingAnswer: CExplanation: C) Borrowing heavily and becoming heavily leveraged makes sense for a company only when it can turn around and use the money it borrows to deliver a return that is significantly greater than its interest payments, percentage-wise. Thus, if a company can borrow at 5 percent and make 8 percent on the money it borrows—a 60 percent gain—it is well worth it for the company to borrow heavily.Diff: 2 Page Ref: 98AACSB: Analytic skills


78) Production data for the number of hours required per unit for making the Droid and iPhone versions of cell phone components by Bizzer, a high-tech manufacturing firm, is given below. What is the maximum number of units that the factory can make of either type of phone component?

Monthly Product

A) 2500B) 2000C) 500D) 1000Answer: DExplanation: D) Both designs require 2.5 hours to manufacture. So whether the factory chooses to make Droid phones or iPhones, it can only make 2500 ÷ 2.5, or 1000 components each month.Diff: 2 Page Ref: 99AACSB: Analytic skills

79) Production data for the number of hours required per unit for making the Droid and iPhone versions of cell phone components by Bizzer, a high-tech manufacturing firm, is given below. What is the maximum number of iPhone units that the factory can make?

Monthly Product

A) 625B) 1000C) 5000D) 800Answer: AExplanation: A) The plant can make a maximum of 1000 units, but since each iPhone unit takes 8 hours to design, the plant can make only 5000 ÷ 8 = 625 iPhone units.Diff: 2 Page Ref: 99AACSB: Analytic skills


80) Production data for the number of hours required per unit for making the Droid and iPhone versions of cell phone components by Bizzer, a high-tech manufacturing firm, is given below. What is the maximum number of Droid units that the factory can make?

Monthly Product

A) 625B) 1000C) 5000D) 800Answer: BExplanation: B) The plant can make a maximum of 1000 units. Since each Droid unit takes 5 hours to design, the plant can work to full manufacturing capacity: 5000 ÷ 5 = 1000 Droid units.Diff: 2 Page Ref: 99-100AACSB: Analytic skills

81) Production data for the number of hours required per unit for making the Droid and iPhone versions of cell phone components by Bizzer, a high-tech manufacturing firm, is given below. Suppose the plant decides to make the maximum number of iPhone components possible and reach the rest of its capacity by making Droid phones. How many of each type of phone will it make?

Monthly Product

A) 375 iPhone units and 625 Droid unitsB) 500 iPhone units and 500 Droid unitsC) 1000 iPhone units and 1000 Droid unitsD) 625 iPhone units and 375 Droid unitsAnswer: DExplanation: D) The plant can manufacture a maximum of 1000 units. Since each iPhone unit takes 8 hours to design, the plant can make 5000 ÷ 8 = 625 iPhone units. The plant fills out the rest of its capacity with Droid phones: 1000 total units - 625 iPhone units = 375 Droid units.Diff: 2 Page Ref: 99-100AACSB: Analytic skills


82) Production data for the number of hours required per unit for making the Droid and iPhone versions of cell phone components by Bizzer, a high-tech manufacturing firm, is given below. Suppose the plant decides to make the maximum number of iPhone components possible and reach the rest of its capacity by making Droid phones. How much profit will it make?

Monthly Product

A) $3750B) $1500C) $5250D) $4000Answer: CExplanation: C) The plant can make a maximum of 1000 units total. At maximum capacity for iPhones, it can make 625 iPhone units and 375 Droid units. At $4 profit for Droid units and $6 profit for iPhone units, the total profit is $4(375) + $6(625) = $5250.Diff: 2 Page Ref: 99-100AACSB: Analytic skills

83) Production data for the number of hours required per unit for making the Droid and iPhone versions of cell phone components by Bizzer, a high-tech manufacturing firm, is given below. Suppose the plant decides exclusively to make either the maximum number of iPhone components or the maximum number of Droid phones. Which choice will result in the greater profit?

Monthly Product

A) Making Droid units will result in $4000 more profit.B) Making iPhone units will result in $250 more profit.C) Making Droid units will result in $250 more profit.D) Making iPhone units will result in $3750 more profit.Answer: CExplanation: C) The plant can make a maximum of 1000 units total. At capacity for iPhones, it can make a maximum of either 625 iPhone units or 1000 Droid units. At $4 profit for Droid units, the plant makes $4(1000), or $4000, for Droid units or $6(625), or $3750, for iPhone units. Therefore, the plant makes $250 more profit making Droid units.Diff: 2 Page Ref: 99-100AACSB: Analytic skills


84) A queuing theory analysis for the Department of Motor Vehicles determines that customers typically wait for 8 minutes and that the agency should strive never to exceed more than 5 customers in a single line. What is the maximum amount of time that customers should be expected to wait?A) 8 minutesB) 40 minutesC) 20 minutesD) 24 minutesAnswer: BExplanation: B) The situation is simple—if the typical customer wait time is 8 minutes and customers are expected to wait for no more than 5 customers ahead of them, the maximum wait time would be 8 minutes × 5 customers = 40 minutes.Diff: 2 Page Ref: 101AACSB: Analytic skills

85) A queuing theory analysis for the Department of Motor Vehicles determines that customers typically wait for 8 minutes and that the agency should strive never to exceed more than 5 customers in a single line. An analysis comes up with a value for P of 0.125. What does this P value mean?A) that customers will wait an average of 12.5 minutesB) that the chances that a customer will need to wait for more than 5 people in line are 1 in 8C) that customers will wait an average of 0.125 minutesD) that the chances that a customer will need to wait for more than 5 people in line are 1 in 12.5Answer: BExplanation: B) The P value of 0.125 indicates that the limit of waiting for 5 customers will be exceeded about 12.5 percent of the time. As a ratio, 0.125 is equal to 1/12, or 1 in 12. A P value has nothing to do with actual wait time, so those choices that have to do with wait time in minutes are incorrect.Diff: 2 Page Ref: 101AACSB: Analytic skills

86) How does a fixed-point reordering system work?A) When inventory level reaches 50 percent of maximum, the system orders new inventory.B) When inventory level reaches 33 percent of maximum, the system orders new inventory.C) At some preestablished inventory level, the system automatically orders new inventory.D) At some random inventory level, the system automatically orders new inventory.Answer: CExplanation: C) A fixed-point reordering system uses cash register receipts to monitor inventory. When inventory reaches a certain predetermined level, new inventory is ordered to make sure that stocks do not get too low.Diff: 2 Page Ref: 101AACSB: Analytic skills


87) Jeff, a manager at the Flux Soap Store, notices that the store regularly runs out of Jasmine-Berry soap. Currently, the reorder point is fixed when inventory reaches 40 percent of maximum. Which adjustment should Jeff make in a fixed-point reordering system?A) Jeff should lower the reorder level to a point where inventory of Jasmine-Berry soap is at 30 percent of maximum. B) Jeff should lower the reorder level to a point where inventory of Jasmine-Berry soap is at 10 percent of maximum. C) Jeff should raise the reorder level to a point where inventory of Jasmine-Berry soap is at 50 percent of maximum. D) Jeff should lower the reorder level to a point where inventory of Jasmine-Berry soap is at half of the previous level. Answer: CExplanation: C) If the store keeps running out of Jasmine-Berry soap, it means that it is waiting too long to reorder and running out of stock. To avoid running out of stock, Jeff should schedule the reorder point earlier in the process.Diff: 2 Page Ref: 101AACSB: Analytic skills

88) Jeff, a manager at the Flux Soap Store, lowered the reorder point for Butterscotch-Lemon soap from 33 percent of maximum to 20 percent of maximum. What is Jeff likely to observe?A) The level of Butterscotch-Lemon soap in stock should increase.B) Sales of Butterscotch-Lemon soap should decrease.C) Sales of Butterscotch-Lemon soap should increase.D) The level of Butterscotch-Lemon soap in stock should drop.Answer: DExplanation: D) Changing the reorder point should not have any effect on sales. It should, however, result in a smaller inventory on the amount of Butterscotch-Lemon soap that is kept on the shelves because the store will wait longer before more soap is delivered.Diff: 2 Page Ref: 101AACSB: Analytic skills

89) Which of the following identifies the goal of managers who use the economic order quantity (EOQ) model?A) minimizing carrying costs and ordering costsB) maximizing carrying costs and ordering costsC) maximizing carrying costs and minimizing ordering costsD) maximizing carrying costs and total costsAnswer: AExplanation: A) Managers who use the economic order quantity (EOQ) model are looking primarily to make both carrying costs, such as money tied up in inventory, taxes, and storage, and ordering costs, which include processing and paperwork costs, to a minimum.Diff: 1 Page Ref: 102AACSB: Analytic skills


90) Mia, a manager at Best Buy, increases the order size for a product that the company sells, which will ________.A) increase both ordering costs carrying costsB) increase ordering costs and decrease carrying costsC) decrease both ordering costs carrying costsD) decrease ordering costs and increase carrying costsAnswer: DExplanation: D) A larger order size reduces ordering costs because over an extended period of time Mia will end up making fewer orders and thereby save individual costs associated with each order. However, at the same time, a larger order will increase carrying costs because it may result in needing to hold onto larger inventories and all the costs, such as storage, that go along with them.Diff: 2 Page Ref: 102AACSB: Analytic skills

91) Mia, a manager at Best Buy, should be able to find Q, the most economic order size for a product, by ________.A) locating where the carrying costs curve and the total costs curve intersectB) locating where the carrying costs curve and the ordering costs curve intersectC) locating where the carrying costs curve and the ordering costs curve are parallelD) locating where the total costs curve and the ordering costs curve are parallelAnswer: BExplanation: B) Since carrying costs tend to increase as order size goes up and ordering costs decrease, the optimum order size can be found where the curves for each variable intersect.Diff: 2 Page Ref: 102AACSB: Analytic skills

92) A new upgrade for a product is expected to increase demand by a factor of 4. If all other factors remain equal, how is EOQ likely to change?A) EOQ will double.B) EOQ will increase by 50 percent.C) EOQ will decrease by 50 percent.D) EOQ will not change.Answer: AExplanation: A) EOQ is computed by finding the square root of the term [2 × D × OC]/V × CC, where D is demand, OC is the cost of placing each order, V is the purchase price of the item, and CC is the carrying cost. If D goes up by a factor of 4, EOQ will increase by the square root of 4, giving a factor of 2 by which EOQ will increase.Diff: 2 Page Ref: 94AACSB: Analytic skills


93) In a short essay, explain the type of strategy that an optimistic manager would take for her company.Answer: An optimistic manager sees strong sales and a healthy business climate. In essence, she sees the "sky as the limit" for the upcoming year, so she wants to maximize her return for this prosperous period. In order to do this, the manager chooses a maximax strategy in which she is looking to find the path that will give her the greatest possible return for her investment of time and energy. Theoretically, this strategy may have a greater downside, but in an optimistic situation, a manager will tend to accept this greater risk to maximize the possible upside of the situation.Diff: 3 Page Ref: 94AACSB: Analytic skills

94) In a short essay, explain the type of strategy that a pessimistic manager would take for his company.Answer: A pessimistic manager sees an uncertain business climate at best. Rather than look for the "big score," he is looking to find a strategy in which he can either minimize regret or maximize his minimal possible payoff. To minimize regret, the manager chooses a minimax strategy in which the maximum regret he can suffer is kept to a minimum. To maximize his minimum possible payoff, the manager chooses a maximin strategy in which he finds the situation in which he can at least keep his minimum possible payoff at the greatest possible level. Diff: 3 Page Ref: 94AACSB: Analytic skills

95) A payoff matrix features strategies S1, S2, S3, and S4 and competitive strategies CA1, CA2, and CA3. In a short essay, explain how maximum regret can be calculated for an S1 strategy. Answer: For the S1 strategy, values for CA1, CA2, and CA3 must be compared to the CA1, CA2, and CA3 values for S2, S3, and S4. To compute regret, find the difference between the S1 value in a column and the greatest value in that same column. Find the regret value for each column, then compare the three regret values for CA1, CA2, and CA3. The greatest value identifies the maximum regret.Diff: 3 Page Ref: 95AACSB: Analytic skills

96) In a short essay, explain how the break-even point (BE) changes with variables TFC (total fixed costs), P (unit price), and VC (variable cost per unit).Answer: According to the equation BE = [TFC/(P - VC)], when TFC increases, BE, the break-even point, also increases, requiring more units to be sold for the product to make a profit. Increasing P increases the value of the denominator in the equation, which results in the value of BE dropping. Finally, increasing VC decreases the value of the denominator in the equation, which results in the value of BE increasing.Diff: 3 Page Ref: 96-97AACSB: Analytic skills

97) In a short essay, explain how managers can use current value for making organizational decisions.Answer: Current value is calculated by finding the ratio of a company's current assets to its current liabilities. A current ratio that is significantly greater than 2:1 suggests that the company is asset-heavy and is not receiving the best return possible on the assets it has. A current ratio of less than 1:1 suggests that the company has too many liabilities and may soon have trouble meeting its short-term obligations, such as payroll, and paying taxes.Diff: 3 Page Ref: 98AACSB: Analytic skills


98) In a short essay, explain what the value of P in queuing theory provides for a manager.Answer: In queuing theory, the manager sets a limit with respect to how long a line in a grocery store (for example) she is willing to tolerate. Computing P tells the manager what percentage of the time she can expect the limit to be exceeded. For example, suppose the manager determines that she does not wish to have lines that have more than three people in them. With a P value of 0.20, the manager can expect to have lines with more than three people in them 20 percent of the time.Diff: 3 Page Ref: 101AACSB: Analytic skills

99) In a short essay, explain how carrying costs and ordering costs change with order size in EOQ (economic order quantity) analysis.Answer: Carrying costs, such as money tied up in inventory, taxes, and storage, tend to increase when order size increases. Larger orders means that more inventory is on-site at any given time, and more inventory results in higher costs associated with keeping that inventory around—carrying costs. At the same time, larger orders drive ordering costs (paperwork, processing costs) down because needing to order less frequently means that the activities associated with ordering are kept to a minimum. The two types of costs, carrying costs and ordering costs, therefore, tend to go in opposite directions as order size changes. Finding Q, the optimum order size, is typically accomplished by graphically locating the point at which the carrying costs curve and the ordering costs curve intersect.Diff: 3 Page Ref: 101-102AACSB: Analytic skills


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